Sunday, October 19, 2008

The Fake Economy

I agreed with John McCain earlier this year that the foundations of the real economy were fairly strong.

Pretty much all of our financial problems seem to originate with a bizarre fake economy created by banks, hedge funds and well intentioned but systemically unstable federal bureaucracies.

William Engdahl wrote on interesting article on one part of the fake economy called Credit Default Swaps. The CDS are relatively new creation which ballooned into a $62 Trillion dollar quaqmire in relatively no time. Apparently, the swaps are made secretly between banks and hedge funds.

Credit Default Swaps are a derivative designed with the intent of protecting the portfolios of super rich investors from risk. The mechanisms were designed to concentrate the benefit of financial stability on the super rich, while distributing the cost of financial risk on society at large. Sure enough, we are all being thrashed about by the externalized risk.

Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction."

There isn't really much original thought centered around Credit Default Swaps. The credit default swaps involve the typical mix of derivatives and short selling of loans.

It is essentially the business model of Enron done on a global scale without consent of the billions affected.

Many reports attribute the creation of Credit Default Swaps to a Ms. Blythe Masters at JP Morgan Chase Bank. Ms. Masters graduated from Cambridge. Judging from her reported 2008 political contributions, Ms. Masters appears to be a left-leaning Democrat.

I contend that both the educational history and political leanings of Ms. Masters are relevant to understanding the current global economic crisis.

The market is a creation of our minds. What we are taught in school affects our minds and therefore affects the market.

If we were taught to value the building of equity, Americans would be spending their lives building equity, instead of this self destructive behavior where people take on onerous loans putting the vast majority of citizens in our nation in a form of debtors prison.

My experience is that left leaning professors are obsessed with abstract tools that can be used to concentrate benefits and distribute costs.

This has been true since Marx. If you ever bother reading Marx, you will find that he does not define communism. What he does is provide a perverted view of the free market (capitalism). A free market is simply a simply a system where people are free to engage in commerce as they please. Capitalism is a system where man is ruled by money.

The central feature of the left's view of capitalism are tools that concentrate benefit on political classes.

So, in my opinion, the way out of this mess is to create new financial tools designed to promote the building equity.

But such systems could not last long in a world where people are taught the negative way of thinking in the school system.

For example, I believe that a free society would have more than one type of financial exchange. The NYSE allows short selling. I think there should be exchanges for small equities that achieve market efficiency through exchanging the stock in real time, and that don't allow short selling.

The problem is that there will be libertarian wanks who will claim that the right to sell property you don't own is more fundamental than the right to actually own property, and the ability to have a vibrant market with different types of exchanges would be crushed under the weight of the ignorance imparted by our schools.